FWIW, I bought PAYCHEX today on the dip because of the following reasoning snipped from the NAIC thread at
Subject 26203
To:Steven Dopp who wrote (223)From: - with a K Tuesday, Nov 27, 2001 12:46 PM
I too was scared off at first by PAYX's high PE multiple, but after further research I had a different perspective.
I've added to my earlier post below to explain this:
SSG: Looks expensive at first but this is a strong and steady growth company that comes out a "buy" up to $42.75 using conservative 17.5% EPS growth vs. historical ave. of 34.4%. ValueLine gives EPS growth through '06 as 27%.
I used ave. low PE of 32 vs. real ave. of 37.9. I used ave. high PE of 55 vs. real ave. of 66.3; both of these felt reasonable to me, as the lowest high PE was in 1996 and was 60.7. The lowest low was in 1999 at 30.8.
I eliminated 1 outlier.
I chose a low price of $28.95 vs. a low price the dividend will support of $31.42. Dropping from a current $36 to below $29 was somewhat improbable as the economy improves, IMO. Feels like the worst is behind us, and PAYX has held up reasonably well.
I used a 25-50-25 zone. SSG gave up/dwn of 6.6 to 1.
PAYX has excellent Section 2 numbers! And a graph of linear beauty!
I also can understand the business model, as was pointed out. It is a little brother to ADP, a company I always wished I had invested in, but PAYX's market seems to have a larger potential.
Some of the questions my club tries to answer are, 1. "Does the company have a sustainable advantage gained through business momentum, patents, a quasi-monopoly, visionary leadership, a proprietary product, new technology, great management and/or inept competition?" and 2. "Is the company part of a paradigm shift (e.g., connectivity, mobility, interactivity)?"
I would suggest the answer to the first one is "yes" because of momentum, management, and sustainable customer relationships. The business model is one of a annuity business, similar to CEFT, which I own. This question is also our attempt to find the "Microsoft business model component" of starting with a beachhead of a core competency and then expanding it to other related products and services. CEFT does this well and my sense is that PAYX does too. I like the "repeatability" and expandability of both company's services. I just can't imagine some small company changing the payroll or HR or debit card service unless it's really screwed up and so far all I see is that both PAYX and CEFT execute well. What's more important to a company than payroll?
The second question I think can be answered "yes" when you think about all the outsourcing that is being done and the vast potential for more. PAYX to me is in the sweet spot as small to medium enterprises do more and more of this outsourcing.
Maybe I'm trying to convince myself to pull the trigger (!) or justify the high multiple. With all its faults, I think the SSG is a good tool for examining high growth, high PE companies like PAYX.
Just my two cents.
To:- with a K who wrote (218)From: mrcjmoney Monday, Nov 26, 2001 8:45 PMView Replies (1) | Respond to of 229
My thoughts on PAYX:
It was my second "must buy" stock on the recent decline. Besides your NAIC's stats, Value Line gives it a 100% for "earnings predictability" and "price growth persistance".
The core reasons why I am a firm believer in PAYX include the following:
1) $614 million in cash & $5.5 million in debt
2) 10-years of 30+ % dividend growth
3) B. Thomas Golisano owns 10.7% of outstanding stock
4) The "Paychex Administrative Services" product is becoming very popular with businesses.
5) The company is diversified with a client base of almost 400,000.
6) The company is moving into larger business projects that ADP has dominated in.
7) I can understand the business model!
To:- with a K who wrote (229)From: mrcjmoney Tuesday, Nov 27, 2001 9:45 PMView Replies (2) | Respond to of 241
Dividend Growth:
1993: .01
1994: .02 (Increased 100% from prior year's dividend)
1995: .03 (Increased 50% from prior year's dividend)
1996: .04 (Increased 33.33% from prior year's dividend)
1997: .07 (Increased 75% from prior year's dividend)
1998: .10 (Increased 42.8% from prior year's dividend)
1999: .15 (Increased 50% from prior year's dividend)
2000: .22 (Increased 46.66% from prior year's dividend)
2001: .33 (Increased 50% from prior year's dividend)
2002: .44 (Increased 33.33% from prior year's dividend)
PAYX is a $13.4 Billion company with $2.5 Billion in cash; no debt; earnings growing @ +20% per annum; proven management team; and understandable business model.
I'm not trying to sell anybody on PAYX. It is one of my core holdings for my stated reasons. But I have a hard time coming up with a better company, with better growth prospects, with a better track record, with a better management team -- albeit trading at a high multiple. |
